Fed rate cut probability

Will the Fed cut, raise or hold its rate at the next meeting? Prediction markets answer with a number that changes live. Here’s today’s, and how to read it.

What the Fed decides, and when

The Federal Reserve is the central bank of the United States. Its Federal Open Market Committee (FOMC) has twelve voting members: the seven governors, the president of the New York Fed and four presidents of other regional Feds, who rotate each year. It meets eight times a year, roughly every six weeks, and at the end of each meeting it announces the target range for the federal funds rate.

Changes are usually 25 basis points (bps). A basis point is one hundredth of a percentage point: 25 bps is 0.25 points.

How to read the market

Each meeting has a market with several answers: “No change”, “25 bps cut”, “25 bps hike” and bigger moves. The price of each one is its probability, and together they add up to about 100%. If “25 bps cut” is at 30%, the market gives a 30% chance that the Fed cuts by a quarter point at that meeting.

There are also longer-term markets, like how many cuts there will be this year or where the rate will end up. Together they sketch the path the market expects.

What moves the probability

• Inflation: the consumer price index (CPI) and the personal consumption expenditures index (PCE). Higher-than-expected inflation pushes toward higher rates.
• Jobs: the monthly payrolls report and the unemployment rate. A weak labor market pushes toward cuts.
• What the Fed says: the statement, the press conference, the minutes and its members’ projections (the “dot plot”).
• What’s happening in the world: energy, geopolitics, financial markets.

On the days that data comes out, you’ll see the biggest jumps on the chart.

Why it matters in Mexico

When the Fed moves its rate, dollar yields change, and so does the appeal of holding pesos. That moves the exchange rate and, often, the room Banxico has to move its own rate. That’s why the Fed’s decision is followed as closely in Mexico as in the United States.

A probability, not an official forecast

The price is what the people taking positions expect, not what the Fed announces. It can change within minutes on new data, and it can be wrong. There are also tools that derive probabilities from interest rate futures; prediction markets ask the question directly.

Follow it in Bomba

In Bomba you see the Fed decision in the Interest rates category, with a live chart, volume and rules, and you can take a position on the answer you believe in. If it’s your first time, start with how to read a price.